You can watch President Obama’s Cincinnati town hall speech live here on C-Span.
A NEW report estimates Mitt Romney’s support for eliminating U.S. Taxes on American companies’ foreign incomes would create 800,000 jobs in other countries.
A Challenging Time for International Tax Policy
By Kimberly A. Clausing, Independent Economist
What would the effects be if the United States shifted to a pure territorial system? First, it would eviscerate the U.S. corporate tax base by eliminating any constraints to shifting income abroad. Second, it would encourage job creation abroad instead of at home.
Based on my research and that of other experts in international taxation, it is possible to estimate how many jobs are at stake in this debate. In 2008 U.S. multinational firms employed 10 million workers in affiliated firms abroad.3 Under a pure territorial tax system, the tax incentive to locate jobs in low-tax countries would increase significantly, which I calculate would increase employment in low-tax countries by about 800,000 jobs. The method for that calculation involves several steps:
1. First, I use the employment tax response elasticity from Table 3 of my 2009 article.4 That study uses data from U.S. multinational operations between 1982 and 2004.
2. I assume that under a territorial system elasticity would rise by 0.98, which is the difference in foreign direct investment tax elasticities between territorial and worldwide system countries in a comprehensive 2008 meta-analysis by Ruud A. de Mooij and Sjef Ederveen.5
3. Using 2008 data for U.S. multinational operations from the Bureau of Economic Analysis, I use actual employment and effective tax rate data for U.S. affiliates in countries surveyed. The effective tax is calculated as the ratio of foreign taxes paid by U.S.-owned affiliates in a country to their net pre-tax income. Those are the most recent (nonpreliminary) data.
4. I assume a U.S. effective tax rate of 27.1 percent, as reported by Jane G. Gravelle.6
5. For each country with an effective tax rate below the U.S. rate, I calculate the implied
number of additional low-tax-country jobs resulting from the larger employment elasticity.
The estimates are uncertain. The direction of possible bias of each is discussed below.
1. The older data may bias those estimates downward, since foreign activity tax responses have been rising over time.7
2. The elasticity difference between territorial and nonterritorial countries was estimated using data from the actual territorial and nonterritorial systems in place around the world during the previous decades. A pure territorial system would entail even larger tax responsiveness than the hybrid territorial systems that are typically used. Thus, this consideration also suggests that 800,000 could be an underestimate of the increase in jobs in low-tax countries.
3. The analysis assumes that the U.S. effective tax rate is 27.1 percent, and it considers only the difference between tax responses under territorial and nonterritorial systems. If the U.S. effective tax rate were to fall because of changes in the tax code, the calculated job responses would be lower.
4. Foreign effective tax rates have been decreasing since 2008; accounting for that would raise the magnitude of the estimates.
Table 1 illustrates the countries that would have the largest job increases in response to a territorial system, according to these calculations. While most of those countries are not tax havens, they do have lower effective tax rates than the United States. The higher tax response under a territorial system would generate increased economic activity.
A similar calculation can be done for the increased income shifting that would occur under a territorial system. Table 2 shows the top 10 countries receiving additional profits (gross income) under a territorial system. Most of those are low-tax.3 This is the most recent year with revised data from the havens and are the locations where disproportionate amounts of income are booked now.
If U.S. unemployment rates are low, jobs abroad need not displace jobs at home, although the composition of jobs may change (and multinational this economy, however, those new, low-tax-country jobs could displace jobs at home. With high unemployment rates, why further tilt the playing field in favor of jobs in low-tax countries? And given today’s budget climate, avoiding further erosion of the corporate tax base should be a priority.
HERE’S THE SHORT:
President Obama’s campaign is examining Mitt Romney’s business record, because that’s what he’s running on his record as CFO at Bain Capital. Romney needs to be up front with the American people, so that we have a clear understanding of what motivates his policy decisions.
Romney is for eliminating ALL taxes on jobs overseas. U.S. multi-corporations have HUGE tax loopholes, meaning they pay low country taxes or none, until they bring the profits back to the U.S.A. That’s the incentive for operating companies overseas.
Multi-corporations are lobbying for territorial taxation system, which Romney supports = NO U.S. TAXATION. This system will have a HUGE IMPACT on U.S. Jobs.
Mitt Romney needs to come clean with releasing his bundlers, superpac, his taxes, and his tenure at Bain. Americans deserve TRANSPARENCY. TRANCPARENCY is critical to his policies, his character.
The President wants to LEVEL the playing field. His approach is to CLOSE tax loopholes. He’d provide incentives; i.e. tax deductions for overseas companies who move jobs back to America, and would eliminate tax deductions until they do.
Right now, the U.S. tax code gives multinational corporations tax breaks for moving jobs overseas. President Obama not only wants to eliminate those tax breaks, but plans to create a new tax credit for companies that bring jobs back home.
In contrast, Mitt Romney’s tax plan would not only protect those existing tax breaks, but would create larger incentives for companies to ship U.S. jobs overseas. In fact, according to a new economic analysis, Romney’s economic plan could actually create 800,000 jobs in foreign countries.
- Romney would eliminate all taxes on the foreign profits of U.S. companies. Currently, U.S. corporations don’t have to pay U.S. taxes on profits earned overseas until those profits are brought back into the United States. If elected, Romney would completely eliminate all U.S. taxes on these profits. Therefore, for the first time in modern history, an American company could move a factory overseas and never pay a single dollar in U.S. taxes on the profits generated by that factory.
- Eliminating taxes on foreign profits could create 800,000 jobs overseas. No longer required to pay taxes on foreign profits, companies would now have new incentives to move their operations out of the United States. Economist Kim Clausing, an expert in international taxation, estimated that Romney’s plan to eliminate these taxes could lead to the creation of 800,000 jobs overseas. These jobs, created in China and other countries, could replace American jobs, drive down the wages of American middle-class workers, and undermine our economic recovery.
- Romney’s plan would also undercut the U.S. tax base. Free to avoid paying taxes back home on profits earned abroad, multinational corporations could exploit accounting rules to make it appear that a large share of their profits are earned overseas. This gimmick would further undermine the U.S. tax base, which could increase the deficit and force small businesses and middle-class families to bear a higher share of the tax burden.